Every bank today is waxing poetically about the opportunities presented with cash management services. Why, then, does it seem that the poor cash management officer is always drinking alone at the end of the bar while a boisterous gang of lenders jokes about non-course deals and LIBOR pricing?
Let’s level with each other. The strategic talk about cash management is partially lip service. Helping businesses manage their money is basically the world’s second oldest profession, but our industry struggles to fully respect and integrate cash management into our core business.
Look at the Numbers!
Banks that ingrain cash management into the hearts and minds of more folks will soon have their own wad of cash to manage. Recent industry statistics highlight where opportunity abounds:
- Informa Research reported that 35% of businesses with sales of $1 million to $20 million now conduct online banking, up from only 18% a year earlier.
- Here at Cornerstone Advisors, we’re seeing that our clients are finding penetration of their Internet cash management product is more than 10 times the install base achieved on their older PC products.
- Treasury Strategies, Inc. reports that bank sweep accounts have been growing at a steady 20% – 30% annual clip and now total more than $270 billion. The firm also reports that smaller banks under $10 billion grew sweeps 44% from 1999 to 2000, compared to 20% for banks over $50 million.
- Despite the growth in sweep accounts, there remains a lot of idle cash for banks to manage – nearly $400 billion in business DDA today!
- To address this opportunity, banks are investing heavily in technology. Microbanker recently reported that cash management is the most popular technology initiative at banks these days. A full 51% of Microbanker readers plan to implement new cash management technologies over the next year.
The Stars Are Aligning
The timing has never been better for banks to get serious about their cash management strategies. Emerging industry trends make this market ripe for those who are innovative and aggressive. Here are some key areas to watch:
#1: It’s Happening Downstream
While big banks have driven the largest corporations into an arena of scale and cutthroat pricing, the mid-market and small business segments continue to have strong potential. McKinsey & Co. recently found that cash management is at least as important as credit for the majority of mid-market companies. Many high transaction companies such as insurance and professional services use some credit services but base their banking choice on cash management capabilities.
#2: ACH = Floatbuster
The bubbling innovations in ACH processing will clearly change cash management. With new NACHA rules, lockbox customers will be able to convert consumer checks into ACH items. A guaranteed 48-hour float sounds good to many companies. The impending passage of the Check Truncation Act will provide further fuel to this fire, as banks of first deposit begin converting checks to ACH. Secondly, electronic check conversion (ECC) at the merchant will grow slowly, but steadily behind the efforts of Wal-Mart. Finally, NACHA’s Project Action may provide businesses with expanded opportunities to accept online ACH payments. No one knows quite where all this change will end up, but banks must be proactively taking their business customers into this new payment world.
#3: Adios Reg Q?
Though it’s been bouncing around the halls of Congress for some time, most bankers are confident that Reg Q (interest on commercial checking) will be repealed soon. This will change the rules of cash management. Although most banks effectively pay interest today through earnings credits, some competitors will be working overtime to “re-intermediate” funds back from off-balance instruments to the balance sheet. For small and mid-sized banks without major cash management market share, this will be an opportune time to make aggressive moves that larger players wouldn’t dare match.
#4: Down the road… there are bills
Although bill payment continues to see slow penetration, direct biller presentment is showing some real underground traction. Industry studies are showing that large billers can justify the investment in electronic bill presentment with only a 2% – 3% adoption rate. The movement from traditional lockbox to an “integrated receivables solution” has just begun. For most businesses, it’s too early for bill presentment, but this clearly needs to be part of a bank’s long-term cash management vision.
Let’s Give Cash Management Some Legs
So, fine GonzoBankers, if your bank has the stomach for a real cash management strategy, I offer the following action plan:
Step #1: Nail the basics
Many banks need to set the foundation for cash management by cleaning up the operations within their commercial account base. This stuff sounds simple, but I guarantee I can find non-compliance in your bank:
a) make sure every commercial deposit account has an appropriate officer code with the relationship manager identified
b) ensure that all appropriate commercial accounts are on analysis and that charges are actually hitting the analysis statements
c) track and measure loan officer fee account analysis fee waivers vs. the size/profitability of the commercial relationship
McKinsey & Co. recently summed up the need for the basics nicely: “Some bankers see cash management as a purely operational product that does not really require a relationship. In the extreme, the relationship banker does not even know his client’s cash management revenues or deposit balances.”
Step #2: Expand business development specialists
Leading cash management providers have realized the value of dedicated sales professionals who focus on the liability vs. asset side of the balance sheet. Unfortunately, Cornerstone typically sees 10 – 15 loan officers for every dedicated cash management salesperson. With kamikaze loan pricing, it’s hard to figure out why this resource allocation makes sense. Sunwest Bank, a small community bank in Southern California, has a cash management professional for every three loan officers. Now there’s a commitment to the business!
Step #3: Broaden product knowledge
While specialists are needed in cash management, growth also needs to be fueled by referrals and direct sales from the bank’s commercial loan officers, investment officers and branch sales professionals. Most of these folks haven’t a clue about cash management products. My plea is for banks to develop a simple training module and certification test on cash management that could fall into the job description of front-line personnel. We don’t need Certified Cash Managers (CCMs) here – just enough to be dangerous and spot opportunity.
Step #4: Notch up the incentives
Nothing goes better with product knowledge than a bit of cold hard cash. Today’s cash management incentives are often too light. $100 for a cash management referral? Probably not enough to get a gun-slinging commercial lender’s attention. Twenty-five basis points on average DDA balances generated? Now we’re talking.
Step #5: Specialize by industry
Some of the most successful banks have differentiated themselves with special industry expertise. Whether the niche is medical associations, property managers, homeowners’ associations, or private school tuition payments, the focused players are winning. Banks with these niches have the opportunity to deepen their service offerings by understanding the specific reporting requirements, system interfaces and regulatory challenges in the particular industry.
Step #6: Continue technological innovation
The more work flow improvements that can be enabled by technology, the more profitability and retention will increase in a bank’s cash management relationships. Here are some examples:
- JP Morgan Chase has experienced great success with its online small business services by providing the ability to link multiple business and personal accounts.
- Wells Fargo has found that customers of its positive pay service, which provides access to check images online, are choosing to look at 30% of their checks at $1 a pop.
- Southwest Bank of Texas has broadened its cash management services to include technology, e-business and outsourcing services to mid-market businesses. This move has increased Southwest’s market differentiation and made it a darling of Wall St. stock analysts.
- Stillwater National Bank has made excellent strides in integrating its image lockbox system with electronic uploads of data into customer accounting systems.
When the dot.coms went bust, a lot of banks lost interest in the technical innovations that are possible in business services. The success of Web, image, and ACH technologies is beginning to reignite this interest, albeit with more pragmatic focus and expectations.
It all sounds like one heck of an opportunity, GonzoBankers. So next time you’re at the local watering hole, wave over that cash management officer and buy him or her a drink. It’s time to integrate this business.
-spw